The blocking of Petronas’s $5.9-billion bid for Progress Energy Resources Corp. casts major doubts on CNOOC Ltd.’s takeover of Nexen Inc., but it also will seriously impact other resource-rich companies that lack the size or capital to develop assets and were looking for foreign buyers or partners, analysts say. “With no details as to why Petronas was denied, we believe that many foreign buyers of Canadian energy assets may be sidelined until further clarity is provided,” said Grant Hofer, a Calgary-based analyst at Barclays.

That will affect natural gas stocks that investors have recently chased as takeout plays, with Canaccord Genuity analyst Phil Skolnick highlighting Athabasca Oil Corp. and Canadian Oil Sands Ltd. as the most vulnerable. But it could also dent investor perceptions of integrated senior producers such as Encana Corp., Talisman Energy Inc. and Nexen.

We believe that many foreign buyers of Canadian energy assets may be sidelined until further clarity is provided

The recent rally in Encana’s shares is at least partially due to speculation the company could be Exxon Mobil Corp.’s next target following the U.S. giant’s recent $3.1-billion offer for Celtic Exploration Ltd. Barclays estimates Encana has a $1.5-billion funding gap next year, part of which was expected to be addressed by monetizing its Duvernay assets.
“While the company is exploring several options, and it isn’t clear this will have any impact on joint ventures, this ruling will at the very least effect the market’s perception of that risk — if not that of potential bidders,” Mr. Hofer said.

RBC Capital Markets also highlighted Encana as the company potentially most impacted by market uncertainty.

“We do not expect any impact on Encana’s ability to consummate its JV initiatives. Nonetheless, following ExxonMobil Canada’s proposed bid for Celtic Exploration, market speculation regarding a take-over of Encana has fuelled its share price performance,” analyst Greg Pardy said in a research note.

Mr. Skolnick, meanwhile, downgraded Talisman to hold from buy because he sees the company having a difficult time selling itself in light of the Petronas news. He told clients “the perceived reduced take-out potential makes this a less exciting story to get new money interested in the stock over the next 6 to 12 months.”

He added the odds of Nexen’s proposed acquisition by CNOOC getting approval have fallen to somewhere above 50%, suggesting “approval will now more than likely have conditions tied to it that could extend the time to closing or even possibly result in a re-pricing of the deal.”

Dundee Securities analyst Jason Konzuk noted investors have been pricing in a potential takeover premium into other companies such as Talisman, Tourmaline Oil Corp. and Birchcliff Energy Ltd. He believes that if the Progress takeover is ultimately blocked, it will lead to an increase in the cost of capital for all Canadian energy companies.

If Ottawa poisons the waters for state-owned investment in Canada, the analyst expects it will benefit companies following “acquire and exploit” strategies and who are largely dependent on domestic capital or have sufficient internally generated cash flow, such as Crescent Point Energy Corp., Whitecap Resources Inc. and Surge Energy Inc.

Mr. Konzuk anticipates capital will also migrate to producers such as Canadian Natural Resources Ltd., Cenovus Energy Inc. and Suncor Energy Inc., which never enjoyed the benefit of a potential state-owned takeover premium and would enjoy an improved competitive position if there is less state-owned oil company investment in the Canadian sector.

Domestically, Mr. Hofer at Barclays thinks there may be increased activity, particularly if certain resource-rich companies are discounted by the market.

“We believe this is likely to be more prevalent among the smaller-cap names, where better capitalized peers (especially with resurgent natural gas prices) may be natural consolidators,” he said.

However, given the uncertain reasoning for not approving the Progress acquisition, he warned that M&A prospects for Canadian energy are severely diminished for the time being.
Source: Bloomberg News

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